Governor Olli Rehn Bank of Finland Opening Remarks at the National University of Singapore, Singapore, 7 November 2019

1. Bank of Finland
Global and European Economy
from the Finnish Perspective
Lunch event hosted by National University of Singapore
7 November 2019
Olli Rehn

2. | Unrestricted
Pervasive uncertainty is still here – growth of world
trade and industrial output have declined sharply
7.11.2019 2
-2
0
2
4
6
8
2012 2013 2014 2015 2016 2017 2018 2019
World trade Manufacturing output
Volume, % growth on previous year
Sources: CPB, Macrobond. 38223@mkteol%

3. | Unrestricted
Bank of Finland risk scenario: Growth to contract significantly
if the trade war damages the financial conditions
• Global economic growth
could slow further from
around 3% to about 1%.
• Significant ramifications
impact on the euro area —
calculations are based on
limited room for monetary
accommodation and no use
of fiscal stimulus.
7.11.2019 3
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
United States Euro area China World
Global financial market shock
Increasingly tight financial conditions in emerging economies
Planned tariff increases
First-year effect on economic growth, percentage points
Source: Calculations by the Bank of Finland.
eurojatalous.fi / bofbulletin.fi
3.10.2019
Risk scenario: trade war escalates, effects spill over to
financial markets

4. | Unrestricted
The Bank of England updated its Brexit calculations in September
– successful preparations have softened the worst-case scenario
7.11.2019 4
Worst-case scenario: no-deal,
disorderly Brexit
• UK GDP declines by around 5.5%
(previous assessment: –8%)
The impact of Brexit on EU27:
10–30% of the GDP losses
experienced by the UK
• Large divergence in country-specific Brexit
effects
Source: Bank of
England

5. | Unrestricted
Euro area GDP, 2008-21
7.11.2019 5
90
95
100
105
110
115
120
2008 2010 2012 2014 2016 2018 2020
Euro area real GDP ECB forecast
Index, 2008Q1 = 100
Euro area, changing composition. Figures next to the line are annual growth rates.
Sources: Eurostat and ECB.
35781@eaBKTindMPEy(en)
0.4
-4.4
2.1
1.6 -0.9 -0.3 1.4
2.1
1.9
2.4
1.9 1.1
1.2
1.4

6. | Unrestricted
Strong jobs growth in 2013-19 – weaker cyclical
conditions have not increased unemployment so far
67.11.2019

7. | Unrestricted
Euro area inflation projected to remain well below 2%
Euro area inflation and decomposition by commodity group
77.11.2019

8. | Unrestricted
Inflation expectations in the euro area still at low levels
7.11.2019 8

9. | Unrestricted
Consequently, the ECB maintains a very
accommodative monetary policy stance
Governing Council’s decisions of September 2019
concerning key ECB interest rates
• The deposit facility rate was lowered from -0.40% to -0.50%.
• The Governing Council now expects the key ECB interest rates to
remain at their present or lower levels until the inflation outlook has
robustly converged to a level sufficiently close to, but below, 2%
within the projection horizon and such convergence has been
consistently reflected in underlying inflation dynamics.
97.11.2019

10. | Unrestricted
Governing Council’s September decisions concerning
the asset purchase programme (APP)
• The Governing Council will restart net purchases under the APP at
a monthly pace of EUR 20 billion as from 1 November 2019.
• The purchases are expected to run for as long as necessary to
reinforce the accommodative impact of policy rates, and to ease
shortly before the Governing Council starts raising the policy rates.
• As previously announced, the Governing Council intends to
continue reinvesting, in full, the principal payments from maturing
securities purchased under the APP for an extended period of
time.
107.11.2019

11. | Unrestricted
Financial conditions continue to ease in the euro area
7.11.2019 11
-2
-1
0
1
2
3
4
5
6
2015 2017 2019
Non-financial corporations Households
Annual growth in loan stock, %
Adjusted for loan sales securitisation.
Source: ECB. 32423@lainakannat en
1
1,2
1,4
1,6
1,8
2
2,2
2,4
2,6
2015 2017 2019
Non-financial corporations Households
Average interest rate on new loans, %
Source: ECB. 32423@korot (en)

12. | Unrestricted
Monetary and fiscal policies in the current context
• Fiscal policy has a bigger role to play when monetary policy is
constrained by the effective lower bound.
• If faced with recession, use fiscal policy space, where and when
available.
• Policy coordination is important to have optimal effect.
• New economic landscape and new monetary policy tools call for a
strategy review of ECB monetary policy framework.
7.11.2019 12

13. | Unrestricted
Intensify the reform of Economic and Monetary Union
• Complete the Banking Union
• From ‘Capital Markets Union’ to ‘Growth and Investment Union’?
• Activate retail investors, both SMEs and households
• Facilitate the European market for green bonds
• Continue working on a European safe asset
• Make the EMU fiscal rules more counter-cyclical
• Debt anchor linked to medium-term growth trajectory
• Expenditure rule to ensure solid implementation
137.11.2019

14. | Unrestricted
Summary: the Euro area outlook in the end of 2019
• Prolonged uncertainty is damaging growth, but no recession (yet).
• Monetary policy remains very accommodative for an extended
period of time.
• Need a better policy mix of fiscal and monetary policy.
• A strategy review of monetary policy under consideration.
• Intensify the reform of Eurozone architecture.
7.11.2019 14

15. bof.fi
Thank you!